Reversal Patterns in Candlestick Forex Trading

There are over forty different reversal patterns in candlestick forex trading. Some are more common than others (and therefore more likely to become technical analysts’ self-fulfilling prophecies), but all have a certain level of legitimacy. Here are a few more.

Three inside up is a bullish reversal pattern over three days (or other time periods):
•    First is a long descending candle, continuing a previous move down;
•    Second is a short ascending candle in the harami position, e.g., the candle body (and therefore the time period’s trading range) is completely engulfed by the body (trading range) of the first candle; and
•    Third is an ascending candle with a higher close than the second day.

Below is an example of three inside up:

Three inside down is a bearish reversal pattern over three candlesticks. It’s the opposite of three inside up:
•    First is a long ascending candlestick continuing a previous move up;
•    Second is a small descending candlestick in the harami position; and
•    Third is a longer descending candle, with a lower close than the second day.

Three inside up and three inside down patterns provide confirmation of the harami’s expected reversal, and are therefore considered more reliable than the harami alone.

Three outside up is another three candle reversal pattern:
•    First is a short descending candle continuing a previous move down;
•    Second is a longer ascending candle in the bullish engulfing pattern, e.g., the body of the second candle (and therefore its trading range) completely encloses the body (trading range) of the first candle; and
•    Third is a long ascending candle with a higher close than the second day.

Below is an example of three outside up:

The opposite is called three outside down:
•    First is a short ascending candlestick continuing a previous move up;
•    Second is a longer descending candlestick, in the bearish engulfing pattern; and
•    Third is a descending candlestick with a lower close than the second day.

Three outside up and three outside down are considered confirmation of the bullish or bearish engulfing reversal, and are therefore more reliable indicators than the engulfing pattern alone.

When trading with candlesticks, it’s important to remember that little differences do matter. If the pattern isn’t followed precisely, then the underlying psychology may not have been met and the interpretation given may not be accurate. Traders who wish to utilise candlestick patterns in their technical analysis must therefore memorise each pattern to ensure they’re getting it right.